US DOLLAR STRENGTH TO CONTINUE?

The US dollar seems to have turned the corner after its recent weakness as the FX market has finally realised that US economic fundamentals and purchasing power have not been in sync with the markets. Today’s rally against the Euro and Sterling have demonstrated that there could be further strength in the greenback on fundamental grounds and geo-political uncertainty. With growth prospects in the US much better than in Europe and the UK combined with goods much cheaper in the US than in Europe and the UK the US dollar has much stronger fundamentals to justify an extended period of bullishness.

The geo-political risk in the Middle East and the threat of war against Syria should also continue to support the US dollar and should be a major beneficiary of any action in the region. The US dollar is considered “the safe-haven currency” of the world and with continued unrest in the region, the US dollar should gain further ground as investors buy US dollars.

Against Sterling, the US dollar is still only a couple of cents away from its multi-month high. Last week (on 21st August) the US dollar was trading above 1.57 USD against the US dollar today it is back to under 1.55 USD. Sterling had strengthened from 1.48 USD in the first week of July when Mark Carney had taken over as the governor of the Bank of England to over 1.57 USD in less than 8 weeks. Similarly, the Euro had strengthened from 1.28 to 1.34 in the same amount of time even though European economic fundamentals are still very weak with unemployment more than 50% in some countries amongst the under 30 year olds and the economies of many countries still in economic contraction and growth prospects still dire.

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With the likelihood of war in the Middle East rising day by day as well as the US economy ahead of the growth curve in Europe, the US dollar should continue to strengthen in coming days and weeks. Add to the fact that weakness in emerging country currencies such as the Brazilian Real, Indian Rupee and Russian Rouble should benefit the US currency, there should be prolonged strength in the greenback. It would not be surprising if the Euro goes back below 1.30 in coming weeks and 1.50 against Sterling in the near future.